Supply Chain
Just How Strategic Is Your Cost Management ?
By Michael Nzule
Profits are a factor of both revenues and costs ( or expenses ). Profits define the starting point of realizing returns in any organization . Strategy is mostly concerned with choices that drive competitive edge to optimize returns . So , it easily falls in to place , that effective strategic management must cover the cost side of the business .
Strategic cost management generally is a key cornerstone that defines the strategic position of a company . It seeks to define cost management practices that are fully aligned to delivering strategic focus . This covers both short term and longterm business horizons . Strategic cost management aids in effective decision making .
In broad terms , strategic cost management is not all about costs control . It is an approach and methods deployed by management to use cost information for efficient managerial decision-making . The strategic objective being the leverage of cost leadership and product differentiation to gain sustained competitive advantage .
Supply chain management encompasses all activities that cover the flow of cargo , the related data , and financing aspects related to this , from sourcing of raw materials to delivery of products to intended final destination . In the flow of these critical business events , costs are inevitably incurred . These costs impact product cost and ultimately the reported profitability . A deeper and closer analysis of cost structures brings out clarity , on costs that must be incurred to drive profitability .
Strategic costs management in supply chain aids in making strategic choices and decisions about costs , at all stages from planning all through to execution . Cost analysis breaks down all the components of costs in each business process . The completeness of this analysis enables effective stakeholder engagement and management at each decision-making point , to drive competitiveness . Effective strategic management must therefore , inculcate strategic cost management in a deliberate and intentional manner .
In supply chain , competitiveness is an outcome of strategic cost management too . In the simplest form , organizations which have cost management at the heart of what they do , are very selective on the costs they take on in their supply chains . They choose costs which assure them generation of highest profits . The approach may seem simple , but in its universe , it involves analysis of budgets , costs , revenue streams , product costs , and profiling costs that directly generate profits or which can be assigned to activities that directly do so .
In profiling the costs that are in a supply chain , it becomes possible to identify costs relationships between value chain activities and the process of managing the costs . This is the core of activity-based costing ( ABC ). The approach of ABC is micro in nature , but a key cornerstone in understanding all the costs and their cost drivers . ABC philosophy is oriented on controlling activities to control and manage costs . All activities and the related expenses or cost drivers are identified and assigned to the total product or process costs .
Activity based costing supports the processes for continuous cost improvement . Cost drivers are in most cases the activities in the whole supply chain . It therefore , is very strategic to choose which activities to be involved in or to include in the supply chain to drive competitiveness and continuous process improvement .
Management must unequivocally keep on answering the question whether the costs incurred or planned to be incurred are expenses or assets . Costs can be either of the two . This depends on whether the end outcome is a sunk or just a period related expense of value creation which as an asset can be sold or exchanged for a profit . Continuous process improvement helps to eliminate costs related to waste . It brings out clarity on the value creating , value adding and value preservation activities and related costs .
Once cost profiles and process activities are established and documented , continuous practice of ABC leads to improved supply chain operations through cost optimisation . Inbound logistics managers , distribution managers can continue re-analysing costs against actual performance . With simulations , better costing models are arrived at in the supply chain , contributing to competitiveness , through better product margins and elimination of redundant process activities and costs . The reviewed cost models evolve and become very specific in nature and detail , to the point that cost visibility in the supply chain becomes the norm . Let us remember that perfection is begotten out of practice .
Some other tools used in supporting strategic cost management include Total Quality Management ( TQM ), Life Cycle Costing ( LCC ), and most recently E-Business . TQM sets the highest possible standards and drives consistency to meet and exceed customer expectations . This does not lose sight of all relevant costs going into delivering superior customer service , with consistency , and reference to how strategic the costs must be . It also supports continuous process improvement and optimisation of costs .
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